Legal structures for businesses - an overview

There are broadly two types of private company:

• private limited company
• private unlimited company

A private limited company may be limited by shares or by guarantee.

Common features of private companies

In relation to set up and administration, a private company:

• Must be registered with Companies House. You can register either via a paper application form or electronically using a third party with access to the necessary software. 
• Does not have to appoint a company secretary but if one is appointed, this must be notified to Companies House.
• Must file its accounts annually with Companies House. The accounts must be audited unless the company is exempt.
• Must send an annual return to Companies House.

You can file your annual return and other documents with Companies House using its WebFiling service. See filing company information using Companies House WebFiling.

Both types of private company must also have at least one member and at least one director.

Directors must notify Companies House of changes in the structure and management of the business.

Finance comes from shareholders, loans, and retained profits. Profits are usually distributed to shareholders as dividends, apart from those retained in the business as working capital.

If the company is active, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to Corporation Tax.

Companies must also comply with HMRC's requirements for PAYE for employers and VAT - see taxes.

Private limited companies

Limited companies exist in their own right. This means the company is legally separate from the people who run it, has separate finances from your personal ones and can keep any profits it makes after paying tax.

A company may be limited by shares or limited by guarantee:

• A company limited by shares must have at least one shareholder. If you're the only shareholder, you'll own 100 per cent of the company. There's no maximum number of shareholders and all shareholders will need to pay for their shares in full if the company has to shut down.
• A company is limited by guarantee if members' liability is limited to a sum they agree to contribute if the company is wound up.

For a company limited by shares, shareholders are not responsible for the company's debts unless they have given guarantees - eg a bank loan.

Shareholders may be individuals or other companies. However, shares cannot be offered to the general public.

Private unlimited companies

A company is an unlimited company if there is no limit on the liability of its members.

These companies are rare and usually created for specific reasons, so it's strongly recommended you take legal advice before creating one.

Tax and National Insurance for company directors

Company directors are regarded as an employed earner for the purposes of paying National Insurance contributions (NICs). This means that company directors must pay both Income Tax and Class 1 NICs on their director's earnings.

Company directors must complete a Self Assessment tax return each year. You will need to give details of the income from your directorship on the employment pages. Register for Self Assessment with GOV.UK.